Now, Judge Arthur M. Schack of Brooklyn has taken things a step further. Since the banks in cases before him have yet to begin complying with the new court rules, he has started throwing out foreclosure cases. But the question isn't whether the banks will now choose to start complying with the rule: The question is: Will they even be able to?

"You Have to Obey Court Orders"

The first case Judge Schack tossed wasCitibank, N.A. v. Murillo, which he dismissed with prejudice on Jan. 7, as the blog StopForeclosureFraud reported. The attorneys for Citibank (C) in that case were from the Steven Baum law firm, a foreclosure mill that has been sanctioned for its involvement in frivolous cases. If the Baum firm couldn't file a timely affirmation in the Murillo case, how many of its other cases will it be able to file affirmations in?

Schack tells me he's thrown out a dozen or so more since Murillo, and he says until the banks and their attorneys start obeying his order to comply with the new affirmation rule, he'll keep tossing cases. A court order is a court order, Schack explains. "They can't just ignore it. In Murillo, they asked for more time, but they didn't give me a reason. It doesn't matter who you are, you have to obey court orders."

By dismissing these cases "with prejudice," Schack is forcing the banks to start the whole process over if they wish to foreclose. Given how long foreclosures take to complete, that alone is a significant penalty. Moreover, if the banks do refile any of these cases, they will be reassigned to him. "We don't have judge-shopping in Brooklyn," Schack explains. So the banks will have to get their papers in order before they refile.
A Gordian Knot of Shoddy Documentation

Schack's dismissals, building on the New York affirmation rule, are finally forcing the issue. The question now: Can the banks actually get their papers in order, or are the worst-case scenarios about mortgage documentation true?

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One reason that banks might be unable to solve their document problems would be that, Massachusetts-style, they had failed to comply with state law during the securitization process. (In Massachusetts, the problem was doing "assignments in blank.") Another reason would be if the securitizations weren't done in compliance with their own terms, as testimony has suggested.

In either of those scenarios, neither the trusts that issued the allegedly mortgage-backed securities nor the banks that service them would be able to foreclose. If a borrower really is in default, some bank might be able to foreclose -- the bank that had legal title to the note and mortgage before any securitization-related problem occurred. Unfortunately, some of those banks no longer exist, others couldn't afford to suddenly discover they own the loans and still others would have to both produce the mortgage and note belong to them and gather the documentation necessary before they could foreclose. As a CNBC analyst describes, that's not likely to be an easy process.

Judge Schack hasn't dismissed every foreclosure pending before him: Just last week, he approved one in which the bank had all its papers in order, including the affirmation. The bank was Bank of America (BAC), which suggests that perhaps the banks can, if they try, do foreclosures correctly.

But before anyone gets too hopeful, Schack explained why that case was so easy: The loan wasn't securitized. Bank of America originated it and serviced it in the old-fashioned model of mortgage lending. So, the ease with which it produced the right documents isn't surprising.

When I first reported on the anticipated consequences of the New York affirmation rule, I spoke with an attorney who did foreclosures on old-fashioned loans, Mark Starkman of Jacobowitz & Gubits. At the time, he said he didn't expect the new affirmation rule to affect his practice, because unlike lawyers dealing with securitized loans, he has and always has had, all the relevant documents in his files.

In short, the root of the foreclosure mess isn't defaulting borrowers -- it's the slipshod way that banks securitized loans. Thanks, banks.